The phrase "regulation by enforcement" is a critique often used in the crypto industry (and other sectors) to describe a regulatory approach where the SEC (or another agency) enforces laws and rules through lawsuits and penalties rather than through clear, proactive rulemaking. This differs from "enforcement of regulations" in significant ways:

1. Regulation by Enforcement

No Clear Rules in Advance: Critics argue that the SEC does not provide explicit guidelines on how crypto firms should comply with securities laws.

Legal Actions Instead of Rulemaking: Rather than issuing tailored regulations or engaging in formal rulemaking processes (such as public comment periods), the SEC takes action by suing companies or imposing fines.

Uncertainty for Businesses: Companies may not know they are violating the law until they face enforcement actions, creating uncertainty and chilling innovation.

Retroactive Punishment: This approach may penalize companies for actions they took before clear guidance existed.

2. Enforcement of Regulations

Based on Established Rules: In a traditional regulatory framework, enforcement follows well-defined rules that were developed through legislation or a formal rulemaking process.

Predictability & Compliance Pathways: Businesses know the compliance requirements in advance, allowing them to operate within a clear legal framework.

Preventative Rather Than Punitive: Regulation aims to guide compliance before violations occur rather than relying on enforcement as the primary mechanism.

Why Is This a Big Deal in Crypto?
The crypto industry argues that securities laws were not designed for digital assets, yet the SEC applies decades-old rules without providing specific new regulations tailored to crypto.

Major cases, such as those against Ripple, Coinbase, and Binance, highlight how the SEC is shaping crypto regulation through litigation rather than clear rulemaking.

The SEC contends that it is simply enforcing existing securities laws, but critics say this approach forces compliance through the courts instead of creating transparent, predictable rules.

Bottom Line
Regulation by enforcement means creating de facto policy through lawsuits and penalties rather than formal rules, whereas enforcement of regulations implies applying already established and clearly defined legal standards. The debate is whether the SEC should issue clearer guidance or continue its current strategy of enforcement actions.

Under Regulation Crowdfunding, the Securities and Exchange Commission (SEC) has established specific criteria that a self-regulatory organization (SRO) must meet to oversee funding portals. These criteria ensure that the SRO can effectively regulate the activities of funding portals to protect investors and maintain market integrity. The key criteria include:

1. Registration with the SEC: An SRO must be registered with the SEC. This ensures that the SRO is recognized by the SEC and subject to its oversight.

2. Rulemaking Authority: The SRO must have the authority to create and enforce rules governing the conduct of funding portals. These rules should be designed to:
   - Prevent fraudulent and manipulative acts and practices.
   - Promote just and equitable principles of trade.
   - Protect investors and the public interest.
   - Facilitate capital formation.

3. Compliance and Enforcement: The SRO must have the capacity to enforce compliance with its rules. This includes having procedures for monitoring the activities of funding portals, conducting investigations, and taking disciplinary actions when necessary.

4. Governance and Independence: The SRO must have a governance structure that ensures its independence from the funding portals it regulates. This includes having a board of directors or a similar governing body with a significant representation of non-industry members.

5. Transparency: The SRO must operate in a transparent manner. This includes making its rules, disciplinary actions, and other regulatory information publicly available.

6. Resources: The SRO must have adequate resources, including financial, technological, and human resources, to carry out its regulatory responsibilities effectively.

7. Conflict of Interest Policies: The SRO must have policies and procedures in place to manage conflicts of interest. This includes ensuring that the regulatory activities are not influenced by the business interests of the funding portals.

8. Record-Keeping: The SRO must maintain comprehensive records of its regulatory activities, including rulemaking, enforcement actions, and communications with funding portals and the SEC.

These criteria are designed to ensure that the SRO can provide effective oversight and maintain the integrity of the crowdfunding market, thereby protecting investors and facilitating capital formation through crowdfunding platforms.

You bring up an important point about terminology in the crowdfunding industry. The term "equity crowdfunding" can indeed be misleading if it implies that all offerings provide equity stakes, when in fact, many do not. The Crowdfunding Professional Association's recommendation to use "regulated investment crowdfunding" is a more accurate and inclusive term.

Here’s an expanded discussion on this topic:

Equity Crowdfunding vs. Regulated Investment Crowdfunding

Equity Crowdfunding
- Traditional Definition: In its original sense, equity crowdfunding refers to a method of raising capital where investors receive shares or equity in the company in exchange for their investment.
- Misleading Aspects: The term can be misleading because not all investment crowdfunding campaigns offer equity. Some might offer other types of securities, such as debt instruments, revenue shares, or convertible notes.

Regulated Investment Crowdfunding
- Broader Definition: This term encompasses all types of crowdfunding that involve regulated securities offerings, not just equity.
- Types of Securities: This can include equity, debt, revenue shares, and other forms of investment contracts.
- Regulatory Frameworks: These offerings are typically conducted under specific regulatory frameworks, such as Regulation Crowdfunding (Reg CF), Regulation A+, and Regulation D in the United States, which provide different levels of oversight and investor protection.

Benefits of Using "Regulated Investment Crowdfunding"

1. Clarity and Accuracy:
   - The term "regulated investment crowdfunding" accurately reflects the range of financial instruments available and the regulatory environment governing these offerings.
   - It helps avoid confusion for investors who might otherwise expect equity stakes in all crowdfunding opportunities.

2. Investor Education and Protection:
   - Using precise terminology is crucial for investor education. It ensures that potential investors understand the nature of the securities being offered and the associated risks and returns.
   - It underscores the fact that these offerings are subject to regulatory scrutiny.

3. Inclusiveness:
   - The broader term encompasses a wider array of investment opportunities, making it more inclusive of different types of fundraising campaigns.
   - It reflects the diversity in the crowdfunding space, acknowledging that companies might choose different financial instruments based on their specific needs and strategies.

Examples of Regulated Investment Crowdfunding

1. Regulation Crowdfunding (Reg CF):
   - Purpose: Allows smaller companies to raise up to $5 million per year from a large number of investors through an online platform.
   - Securities Offered: Can include equity, debt, and other types of securities.

2. Regulation A+:
   - Purpose: Enables companies to raise up to $75 million per year from the public with fewer disclosure requirements than a full public offering.
   - Securities Offered: Primarily equity, but can also include debt and other securities.

3. Regulation D (Rule 506(c)):
   - Purpose: Allows companies to raise an unlimited amount of money from accredited investors with general solicitation and advertising.
   - Securities Offered: Can include equity, debt, and other types of investment contracts.

Conclusion

The shift from using "equity crowdfunding" to "regulated investment crowdfunding" is a positive development that enhances clarity, accuracy, and inclusiveness in the crowdfunding industry. This terminology better reflects the variety of financial instruments available to investors and underscores the regulatory framework that governs these offerings. By adopting this term, industry stakeholders can help ensure that investors have a clear understanding of what they are investing in, ultimately fostering a more transparent and trustworthy investment environment.

There is a federal exemption for Demo Days but it is useless because it doesn't preempt state law. To legally do a demo day where the public is invited, even if the event fits under the Demo Day exemption, it will still be illegal to do public solicitation under state law (unless the offering is being done under Reg CF or Rule 506(c) in which case there is federal preemption).

Yes, both the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) play roles in regulating investment crowdfunding. 

The SEC oversees securities markets in the United States, ensuring that investors are protected, markets are fair, orderly, and efficient, and capital formation is facilitated. The SEC has established regulations for crowdfunding, which are designed to help smaller companies raise money while still providing protections for investors. These rules are part of Regulation Crowdfunding (Reg CF), which allows companies to offer and sell securities through crowdfunding.

FINRA, on the other hand, is a non-governmental organization that acts as a self-regulatory organization (SRO) for brokerage firms and exchange markets. FINRA is authorized by Congress to protect America’s investors by making sure the securities industry operates fairly and honestly. Within the context of crowdfunding, FINRA is responsible for regulating crowdfunding portals, which are online platforms that facilitate the offering and selling of securities through crowdfunding. Crowdfunding portals must register with the SEC and become a member of FINRA to operate legally.

Both organizations ensure that platforms adhere to the regulations set forth to protect investors and maintain the integrity of the securities market. This includes rules about who can invest, how much they can invest, and how companies can raise funds through crowdfunding.

Since the passage of the JOBS Act and the subsequent rulemaking, there has been massive confusion by the general and investing public who often conflate the activities of the regulated investment crowdfunding industry and those of rewards-based or donations-based crowdfunding platforms. Aside from marketplace confusion, there is considerable reputational risk that regulated entities, and the regulated industry as a whole, face by being mistaken for the activities happening in a less regulated environment and by unlicensed actors (e.g. GoFundMe, Kickstarter, IndieGoGo).

Furthermore, while admirable, the efforts by some industry participants to provide clarity through use of other terms (e.g. “online capital raising,” “investment crowdfunding,” or “equity crowdfunding”) are insufficient or, in some cases, potentially misleading.   

By embracing ‘Regulated Investment Crowdfunding,’ we not only clarify our industry's scope but also underline the legal and regulatory frameworks that govern our operations. 

Regulation D (Reg D) crowdfunding refers to a specific exemption under the U.S. Securities and Exchange Commission (SEC) regulations that allows companies to raise capital through the sale of securities without having to register those securities with the SEC. The regulation is part of the broader set of rules governing private placements.

Regulation D provides three different rules (Rule 501, Rule 502, and Rule 503) that companies can use to conduct private placements, and one of these rules, Rule 506, is commonly associated with crowdfunding activities. Rule 506 has two variations: Rule 506(b) and Rule 506(c).

1. Rule 506(b): This is the traditional form of private placement under Regulation D. It allows companies to raise an unlimited amount of capital from an unlimited number of accredited investors (typically high-net-worth individuals and institutions) and up to 35 non-accredited investors who meet certain sophistication requirements. The company, however, cannot engage in general solicitation or advertising to attract investors.

2. Rule 506(c): This variation allows companies to engage in general solicitation and advertising to attract investors, but all investors must be accredited, meaning they meet specific income or net worth criteria. This rule provides greater flexibility in marketing and reaching potential investors.

It's important to note that crowdfunding under Regulation D is distinct from crowdfunding under Regulation Crowdfunding (Reg CF), which is a separate SEC regulation that allows companies to raise smaller amounts of capital from a larger number of both accredited and non-accredited investors through registered crowdfunding platforms.

In summary, Reg D crowdfunding allows companies to raise capital through the sale of securities without a full SEC registration process, primarily targeting accredited investors. The specific rules and requirements depend on whether the company chooses Rule 506(b) or Rule 506(c).

The difference between a Rule 506(b) offering and a Rule 506(c) offering under Regulation D of the U.S. Securities and Exchange Commission (SEC) follows:  

1. Rule 506(b) Offering: 
   - Accredited and Non-Accredited Investors: In a Rule 506(b) offering, issuers can raise capital from both accredited and non-accredited investors. However, if non-accredited investors are included, the issuer must meet certain disclosure requirements, and there are limitations on the number of non-accredited investors that can participate.
   - No General Solicitation: Issuers are not allowed to engage in general solicitation or advertising to attract investors. The offering is typically limited to a pre-existing network of investors.
   - Self-Certification: Investors can self-certify their accredited investor status, and the issuer does not have the same obligation to verify the accredited status of investors as required in Rule 506(c).

2. Rule 506(c) Offering:
   - Accredited Investors Only: In a Rule 506(c) offering, issuers are allowed to solicit and advertise the offering to the general public. However, they can only accept investments from accredited investors.
   - Verification of Accredited Status: Unlike Rule 506(b), Rule 506(c) requires the issuer to take reasonable steps to verify that investors are accredited. This verification process adds an extra layer of due diligence.
   - No Limit on Offering Amount: There is no specific limit on the amount of capital that can be raised in a Rule 506(c) offering.

In summary, the key differences between Rule 506(b) and Rule 506(c) offerings lie in their approach to investor eligibility, solicitation methods, and the verification of accredited investor status. Rule 506(b) allows for a broader pool of investors but restricts advertising, while Rule 506(c) permits general solicitation but limits investors to accredited individuals or entities.

The SEC has been relatively lenient with crowdfunding issuers (as opposed to crowdfunding intermediaries), possibly so as not to stifle this emerging industry, so as yet there is not really a "most common" way to get in trouble.

They have brought a series of actions against companies raising under Regulation A for failures to comply with the very technical requirements relating to how Reg A offerings are modified, extended or expanded. They have also brought actions against Reg A issuers for misleading statements.

However, I am not aware of Reg CF issuers getting into the same sort of trouble, even though I have seen significant violations of the various ways they can get into trouble (companies not eligible to use Reg CF, companies failing to extend or expand offerings in compliance with Reg CF, companies making misleading statements, companies violating the Reg CF communications rules). I have heard anecdotally of the SEC warning issuers that they should get advice from a securities lawyer, though.